Guest Post: Is The Fed Funding The Treasury Through The Banks?

Tyler Durden's picture

Submitted by a reader

Fed balance sheet - Is the Fed funding the Treasury through the banks?

Recently I decided to take another look at the Fed's balance sheet, and while I am none too surprised, I must report that the Fed has printed approximately $200B from April 7th 2010 to June 30th 2010. What is interesting is *how* they went about doing it.

Here is the graph which shows this. The blue line represents the total increase in the size of the Fed balance sheet since September 10th 2008. The red line represents the marginal increase in the Fed balance sheet, net of 'Excess Reserves' held at banks but not yet loaned out, and net of Treasury sterilization:

Note that from November 2008 through April 2010, "Real Economy" printing was essentially the same. Sometimes it grew, but inevitably those periods were reversed. The Fed was clearly targeting that figure. Well, something changed as of April 7th 2010.

That date should ring a bell. It is almost exactly right after the end of the Fed printing programs, which finished up at the end of March. From their 3/16/2010 FOMC statement (FRB):

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month... In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral.

So as of March 31st 2010, all money printing programs and all special liquidity programs were over and done with, except for CMBS TALF. And yet the *very next week*, this new wave of net printing was allowed to hit the market, after such printing was held constant for 17 months. Hmm!

Given that those programs have all ended, the next logical question is how this net printing has come about. The chart below shows Total Fed Assets, the Treasury Supplemental Liquidity Program, and Excess Reserves in the banking system:

Below is another way of visualizing the Fed's balance sheet, splitting up assets into securities purchased outright by the Fed, versus liquidity measures:

Both have essentially gone flat.

What we see is that Bernanke has indeed stopped those programs for all intents and purposes. The net printing shown above has come through a decline in bank Excess Reserves. Whereas before such declines in Excess Reserves were met by Fed sterilization through a shrinkage of the Fed's own balance sheet (for example, see May - July 2009), nothing of the sort has happened this time. That money is just being allowed to enter the system, period.

The next logical question is where the bank lending that has replaced the Excess Reserves is heading. Well, we know it is not hitting the consumer debt market, given the latest Fed reports. Consumer credit has continued to shrink (ref), and the government is the only marginal lender (chart). And just ~20 days later, risk assets began falling hard. It seems doubtful that they are ramping up risky lending at a time like this.

My theory is that the money has floated into the Treasury market. A lot of people have wondered how the Treasury would be able to continue running record deficits without the Fed buying. Well, we now know that the banks are picking up a lot of slack in the lending markets, and they are doing so in the midst of very dicey market conditions. Is it that much of a stretch to posit that the Fed reached an agreement with them whereby the banks would take over where the Fed left off?

If this is true, Bernanke is talking a good game while continuing to dole out free booze. The guy is doing what Krugman is saying without openly acknowledging it. I am amazed that no one is talking about this!

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Apostate's picture

Yes, that was Paulson's bargain. They borrow at nothing, get free money from the Treasury, and keep the government propped up. 

A_MacLaren's picture

Its not the Treasury's money.  Its *our* money.  This is part of the stealth wealth transfer to the banksters from the taxpayers.

Gubmint digs a deeper debthole, Fed prints, banksters borrow at zero, lend at low rates to gubmint earning the spread, while ultimately taxpayers are on the hook for the interest.  Wealth flows from productive sector, taxpayers, to the vampiric leeches, the banksters.

Is that a sucking sound I hear?

Missing_Link's picture

Its not the Treasury's money.  Its *our* money.  This is part of the stealth wealth transfer to the banksters from the taxpayers.

^^ Truth

Scooby Dooby Doo's picture

This is part of the stealth wealth transfer to the banksters from the taxpayers.

Why are your thoughts limited to the banksters? The homeowner who was approached by a mortgage refinance company back in 2006 has no blame to shoulder?

In 2006 the refi company tells the homeowner that he currently has $200K in equity and he can get him $150K without a problem. Homeowner takes the cash and in 2009, defaults, strategically. Walks out and the mortgage company never hears from them again. After the foreclosure the bank get $45,000 for the house.

Who covers the loss? Taxpayer?

A_MacLaren's picture

Strawman argument.

My comments are germaine to the article and yours are not.  Nonetheless, I'll play out your hypothetical scenario.

Most all refi's are recourse, but subject to state law limitations.  Get better skip-tracers. The defaulter has a SocSec#, its all over the loan docs.  Track 'em down.

In your hypothetical situation, did the refi-co get the loan put back to them from Fannie/Freddie or the MBS manager?

If yes, responsibility and accountability.  Who was rsponsible for originating the loan, the refi-co.  If they made a bad loan due to bad due diligence in terms of the credit quality or in mis-assessing the impossibility of ever increasing home prices, then the refi-co should eat humble-pie in regards to the loss, if they can't obtain and enforce a judgement.

If no, why aren't Fannie/Freddie/MBS mgmt chasing the deadbeat?

If the refi was done non-recourse, the defaulter took advantage of a legal loophole.  I don't like it, but the defaulter is within the law.  Any finance company (refi-co, bank, Fannie/Freddie/MBS) that doesn't make strategic allocation for losses, fraud, etc., by Darwinian economic selection, should be out of business.

Federal Reserve Ponzi scheme to steal the wealth of an entire nation to benefit an industry of parasites is a crime magnitudes larger than your pitiful strawman situation.

-1Delta's picture

it depends on how u look at it...if it were our money would we have gave it to them? It is our liability.. not our money. It was HPs deal... to prop up the Gubmint

A_MacLaren's picture

The fact that the Conmen tricked the gubmint and people into using "negative value" or debt money, in place of "positve value" hard money, does not absolve the Conmen of their crime.

Helix6's picture

You're living in the past, Dude!  It's not your money, any more than it's your government!

Of course you hear a sucking sound!  With the brief exception of the 40 or so years between the last great depression and 1980, it's always been so.  The rich and powerful take what they want and their victims suffer what they must.  Ronald Reagan understood this implicitly and believed it to be the basis of the natural ordering of society, thus putting this country back on the road to a medieval society.  Figuratively speaking, you are a peon sharecropping on the baron's estate, and half of your production goes to him!  There is literally zero difference now between life in America now and life in Medieval Europe, with the exception that today's peons have some small share of the vast wealth created in the 40 year period, by which they maintain the appearance of prosperity.

Make no mistake: That too shall fall victim to the predations of the wealthy and powerful, as the "middle class" digs into its inheritance in an attempt to maintain its standard of living.

The remedy to our dilemma is to place constraints on the accumulation of wealth and power, but this runs contrary to the exercise of power (thus the dilemma).  The whole idea of unconstrained power is to dominate and exploit, thus extending itself ever wider.

It mystifies me that people do not get that; that they do not see through all the "free market" hype for what it really is: a ploy by the wealthy and powerful to avoid any constraints being placed on their continued expansion of wealth and power.  The price of this mass delusion will be extreme -- the reduction of those masses to serfdom.  

dark pools of soros's picture

yes i thought that this was pointed out many times by Tyler already??

their little secret way of recappin the banks via whoever's kids taxes that are still here with a job to pay em 



Turd Ferguson's picture

No fucking shit. Really? Really?

Rusty_Shackleford's picture


Borrow at 0% from Ben and lend at 1%-3% to Uncle Sugar.

I'd like in on some of that action.

I believe the technical name for that is "daisy chaining".

Rainman's picture

.....or better named the triangle of deception. Fed, UST and the banksters are wired together at the hip. If one stumbles out of the lifeboat they all drown.

Careless Whisper's picture

@ rainman

triangle of deception indeed. but why not skip the middle man (the federal reserve bank) and just have the u.s. gov print it's own money that is needed for the deficit. no borrowing, and thus save all that interest.   anyone ???

LeBalance's picture

FED == Owner's Agent in Receivership

Dental Floss Tycoon's picture

Fed = supplier

Government = addict

An addict with an unlimited supply always OD's.

SheHunter's picture

And there's Santelli on CNBS ranting with glazed eyes and breathe about "how great the auction went this afternoon".  Means GS et al stepped up to the plate and did their patriotic share.  Tu comprend pukingly pathetique(accent grave).

Helix6's picture

I thought it was more like "money laundering"

NOTW777's picture

but, how long can the cooperating "banks" survive in this scheme

Apostate's picture

It's a closed loop. They can survive as long as there's still political will to keep the show going.

As far as the Fed is concerned (if you imagine it as an entity rather than the a collection of individuals), the government and the major corporations are merely tools that can be disposed of once they have outlived their usefulness.

You can see it in England now. The "sacred" government built up over decades is being sloughed off with stunning alacrity. 

sgt_doom's picture

+100000 to Apostate.

There is no economy.

There is no media.

The US is simply one large criminal enterprise, fundamentally run by the multinationals or the bank-oil cartel, however one phrases it.

That's all, folks!!!!!!!!!!!

Snidley Whipsnae's picture

@ Apostate... +1,000.

...and Sgt Doom... you left out: and there is no budget!

knukles's picture

Tremendously Important.

No Media.

Beginning that many are wondering where one can find 'news" these days.  Certainly not the MSM whether press, radio or tv.  So much of web based is so entirely biased, slanted, tainted, expostulating a specific point of view, a narrow agenda.  This is becoming more than worrisome, as many conclude that the majority of news dissemination vehicles have or are in the process of being "compromised" in some manner.

Bear's picture

Ya, even the Huffington Post

divide_by_zero's picture

It started out that way out of the gate, Soros contaminates all he touches.

Future Jim's picture

"the government and the major corporations are merely tools that can be disposed of once they have outlived their usefulness."

Then what?

mudduck's picture

Maybe the banks aren't meant to survive, at least not the ones who have leased all the gold. Who owns the fed exactly to the penny, and lets see and assay the gold. If ownership is spread out evenly through member banks with no single family, bank, corporation,or other entity having a heavily concentrated or controlling position, and there are 8300 and change tons of gold still physically stored and unencumbered, well I for one will shut up. I'm not the sharpest knife in the drawer but these guys (central bankers) had to know from the start that the fractional reserve system couldn't work forever from the start just because of the exponential growth needed for it to continue.                                                                                                                                                                         Once they get everyone off the gold standard they've got it made, get governments spending and borrowing (easy as breathing) to the point where the politicians are so worried about how they come across and getting re-elected that they don't even worry about making the central bank tell how much money they have actually created 'for you', (M-3 reporting). With politicians bought and paid for (for the most part) and never the less on a very short time frame planning wise and with the central bank making banking rules and regs how hard is it to create a credit boom bust, roasting the banks who have leased all the gold over the years (central banks may have even started, bought, owned etc. these banks just for the purpose of leasing gold before going bankrupt).                            Why? So that when the 'leaders' get involved to try to fix things, then come the sovereign debt crises, and then come the currency crises. Once the currencies crises hit then the central banks knows for sure they will be audited, demonized and dismantled. The audit will show that most of the nations gold has been leased out to banks that no longer exist and never did return the 'borrowed gold'. At the same time a new currency or exchange medium is needed by the world that can be trusted in a no trust environment. Gold, silver, oil, or other commodities will be trusted and talked about but gold is the only one in the end that will work. Most countries will no longer trust mere polititions to create their money, or any central bank that can hide in the shadows,and most of the countries gold is gone, what to do?                                                                                         Then along comes the BIS or IMF or world bank or whatever saying 'we have x-amount of gold and will issue currency backed by gold (the gold that they stole while issueing the last worthless currencies).  This is the only endgame I can think of for the way things are going. The central bank thing has to be a very sweet gig if you are on the inside, and it seems that it took a lot of planning and patience to set up (decades or more in the USA) worldwide. Massive power and influence (and intelligence) to set up across Europe and America when a meeting of minds involved days, weeks or more of travel. Quite an enterprise, old and established, to let come unravelled under leaders the likes of Timmy G, Ben B, G Brown,M King, Greenspan and Trichet. Yup, quite the group of deep thinkers and long timespan masterminds to be given reign by a group who planned and carried off such a thing before modern communication, and travel and have remained anonomous for almost a century and into the internet age (Clinton gets a blow-job and the world knows, but who really owns the private entities that print the worlds money). No, if the worlds central banking/currency system blows up it's on purpose, not because an engenious, patient evil empire got sloppy and dumb. And that (one world medium of exchange, based on gold, that you have stolen most of the worlds above ground stocks, and thus own), is the only end game (barring population control) I can come up with. If the gold is still there, and we can find out who owns the fed, before pitch-forks become the latest 'goin to town to vote' accessory, then maybe everything will work out? Nah. Sorry for so long of a post, have heard lots of theories and predictions about what can or could happen but not to many on why.   

Buyemall's picture

is this something like a goverment issuing bonds and the country banks are buying with money lent to them by another entity (ECB for example) for liquidity puproses?

sgt_doom's picture

Now you're catching on.....

Psquared's picture

That may be, but it has not affected the availability of credit. I am in a position where I can see the flow of credit first hand and I can say unequivocally that banks ARE lending.

Reese Bobby's picture

Who are the banks lending to?  I see is continued pressure on corporations to reduce bank lines via the corporate debt markets.  Consumer credit is declining.  Mortgage lending is done by the Feds.  Who are the banks lending to?


Given the banks are not marking to market it makes sense to me that the free Fed carry trade is the favored "lending" by banks.

sgt_doom's picture

"Who are the banks lending to? "

If you are referring to the major banks, they really aren't lending to anyone, still primarily involved in speculating.

Psquared's picture

Mainly to consumers for big ticket purchases like homes, cars and even appliances. No drop off at all. I see stricter underwriting, but if you have a good beacon score you can borrow. I also see small business loans being made. Again, stricter underwriting, but the loans ARE being made.

Reese Bobby's picture

Facts backing up your claim would be of interest.  Consumer credit is contracting.  Banks aren't making many car loans; the Fedral Government is, (GMAC/ALLY).  Small businesses widely complain of tight credit, while they wait for higher taxes in 6 months.  You might have a unique view but I'd love some facts.  -Best

Psquared's picture

That is just not true. I see it every day. BAC, WFC, Chase, Regions, and smaller regional banks are making car loans every single day. My office is right next to the F&I guy and I see it every single day. A customer came in today and just got approval for a loan to open two new Bojangles and a Subway Shop.

Rumors that credit is not available and banks are not loaning are just falsehoods spread by people with some sort of "interest" or macabre pleasure from propagating rumors of armageddon. I am telling you I am in the trenches and it just ain't happening.

Now, I am not saying that Monday it won't come to a screeching halt. Anything is possible and credit markets can lock up very quickly. But to say banks are not lending is a ball-faced lie.

banksterhater's picture

I've read anecdotal quotes several places, from bankers, especially regional, they ARE making loans but qualified hard to find. Don't know why this truth hurts. Debt Hogs go BK, new ,solvent borrowers emerge. No? I know there's someone employed and accept it even though I'm not.

Scooby Dooby Doo's picture

It's happening within the constructs of the ZH website, to be sure. Do not rock this boat here my friend or they will send the cleaner to visit you.

Repeat after me: The credit market is frozen, the market is on the verge of collapse(s&p will trade down to 100), I love gold, CMBS is going bankrupt US investors, nobody's buying, Sovereign CDS implosion will bankrupt everyone else, I love gold.


Marla Singer's picture

I'm going to need you to retract that, please.

SheHunter's picture

Oh the smaller banks are still loaning- so long as they know you, your family, your livestock and you sign off your life for loan collateral.  AND give blood during your oath to pay back on time.  Me speaketh from recent experience.  Known the bank for 13 years, have had 3 previous business loans all paid back on time and THIS time around the app/acceptance process was a whole new ballgame. 

Teaser's picture

Yes, loans are being made, of course.  But the facts are that the rate of lending is dropping like a rock.  So, since you're likely 20ish, and just got your first job as a service rep at your local bank, making less that you would be flipping burgers, sure, you'll see loans being made.  But 3 years ago, they were making 10 times the number of loans.

The facts plainly dispute your pitiful anecdotal data.  Credit is contracting at a mind numbing speed.

Psquared's picture

You are a fool and you have NO idea what you are saying and you know nothing at all about me.

Future Jim's picture

Psquared, defend yourself. How do we know that what you are seeing is high or low volume compared to the before time - or why?

BTW, I tried to refinance my house around January 2009, but no one would lend to me. Then around March 2009, I received much interest and effortlessly refinanced my house on very good terms, and then due to unusual circumstances, I effortlessly refinanced later in 2009 for even better terms. Then I got a business credit card (I'm an independent contractor with an LLC) with a high credit limit in spite of having several personal credit cards with high credit limits.

Now it is true that I do have an excellent credit score and no credit card debt, so perhaps the credit drop off simply reflects the elimination of high risk loans that should never have become ubiquitous in the before times, and perhaps it also reflects less buying of homes, cars, etc.

Quinvarius's picture

You say this even as home and car loans are diving off a cliff?

Snidley Whipsnae's picture

Consumer credit, revolving and non revolving is contracting drastically. State sales tax collections are contracting if corrected to show the state sales tax increases, property taxes same. I can believe that the top 5% of income earners/renteir class is still getting loans but not Joe 6P...Show me the numbers please.

Psquared's picture

Go back and read my posts. I never said consumer credit is not contracting. I simply said that anyone who makes the statement that banks are not lending is spreading a falsehood and I know it is false from personal and daily experience. I see it every day and I have been involved with lending from some angle for over 30 years.

goldfreak's picture

anybody can claim anything. Yeah I work at a bank too and we're not lending anything

jdrose1985's picture

Couple guys I went to school with work in loan departments of small local community banks. Both have said if you haven't gone in to get a loan yet it's not going to be happening. Both are worried to lose their jobs.